This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

November 30, 2014

Free Market Regulation

The idea of perfection in the market place is an impossible
achievement. Regardless of what our position may be in the business cycle,
there will not be a moment of collective realization where everyone can agree
that the market place is exactly where it needs to be. Therefore, if we can
agree that idea of perfection in the market place is unreasonable, then what
makes the possibility of imperfection in the market place credible? The point I
am driving towards is that in most cases regulations are imposed on the free
market when there is market failure, or imperfection in the market place.

We understand how the market works; furthermore we know that
the market is a discovery process. Building on this concept, I believe that
market corrections can be achieved without government assistance. Once a market
failure has been realized, is it really up to the discretion of the government
to step in and act in order to produce more ideal outcome? I think not. Rather,
I think the answer to correcting a market failure is through no regulation at
all.

One way to correct a market failure is through competition.
For instance, just before the depths of the recession, the market was beginning
to correct itself by eliminating the firms that were not competitive. During
that time we saw Lehman Brothers fail because of its position with sub prime
mortgages, what’s peculiar about this is how few firms failed because of
government intervention. Rather then letting fate decide the success or demise
of another investment bank, Bear Sterns, the government stepped in and provided
a bailout, likewise for AIG. The problem with this is that government
intervention interferes with our assumption that the market is a discovery
process, and furthermore weakens the possibility of the market to find a better
way to operate.

Likewise, government regulation of the free market in times
of market failure force outcomes that are not beneficial for entrepreneurs in
that market. The issue I see with regulation and those who impose regulations
is that they (politicians/government officials) may not be able to tell if they
regulations they are imposing are working or not, whereas the entrepreneur can
gage effectiveness of a regulation through either an increase in profits or
loss. With regulations in place, entrepreneurs have to figure out how to work
with the regulation to achieve the best possible outcome and not surprisingly
this leads to a lack of discovery in the market place.